AEB 3103 Principles of Food and Resource Economics

Module 5: Price controls, quotas, and taxes

Remember the invisible hand theorem: “Spontaneous market players making self-interested decisions will collectively achieve the most efficient allocation of resources.”

How can government intervene market transactions?

But is it really a bad idea to control price?

Housing price index (Case-Shiller) for Gainesville FL: https://fred.stlouisfed.org/series/ATNHPIUS23540Q

Renter price index for Gainesville FL: https://www.zumper.com/rent-research/gainesville-fl

(Causal estimate of) Median income at age 35: https://www.opportunityatlas.org/

How do we thinking about the current housing crisis?

How does Gainesville rank in the above three categories (with a scale of 1-10)

Different ways of rent stablization

One quick way of fixing this problem: rent control - limiting the amount of rent that the landlord can charge the tenants.

Different forms of rent control

“Landlords cannot be allowed to raise rents to whatever they want, whenever they want. We need national rent control.” — Bernie Sanders

“Rent control is one of many tools that local jurisdictions can use to promote access to affordable housing.” — Pete Buttigieg

“It’s time that we stop commodifying the housing market because it is not a speculative investment, it is a basic right for all Americans.” — Alexandria Ocasio-Cortez

Discuss with your peers:

If Gainesville enacted a rent control policy starting of today, within the next 10 years what will happen to:

The Economics of Rent Control

The simpler version

But rent control also have other problems:

What will landlords do with the property if they are only receiving $500/month for an apartment with a market rent of $1200?

Why isn’t the landlord afraid of the tenants moving out/write bad reviews?

Rent-stabilization makes it harder to find housing

Can low-income households actually get those rent-stabilized apartments?

Rent Stablization creates black markets (and corruption)

And other types of problems

Amending rent controls: do these work?

In-class exercise:

Suppose that the demand curve for taxi rides is P = 10 - 2Q. The supply curve for taxi rides is P = 0.5Q.

  1. If the government imposes a price ceiling of $4, what is the deadweight loss in this case?
  2. If the government imposes a price ceiling of $1, what is the deadweight loss in this case?

So why price controls?

An extreme example

Price Floors

Sometimes governments intervene to push market prices up instead of down.

That creates a surplus: too much production, too little demand

Problems with price floors

Graphing price floors

Quotas

Let’s first think about the non-transferable case

If the city of New York issues a fixed amount (that is fewer than an open-market equilibrium) of non-transferable permits:

  1. What does that say about the profitability of driving a cab?
  2. Who will eventually get the permit?
  3. At what “price”?
  4. Who will be drive the cabs?

New York’s Medallion Market

This means that medallion is an asset that generate economic rents

Scarcity rent

What can we say about quotas from the graph